The Biggest Thing Paul Ryan Gets Wrong About The Fed

Paul
Ryan was on CNBC this
morning, giving a mostly agreeable interview about the poor state
of the economy.

Mostly it was pretty standard stuff, but he does repeat one
talking about that is a myth that is worth debunking, if only
because it's so widespread.

Ryan took issue with the Fed's quantitative easing.
Specifically he said:

"At the end of the day, all this easing, is simply, in my
opinion
trying to bail out bad fiscal policy."

Now there is one reading of this where it might be true. If the
Fed had stimulated more aggressively, there might not be as much
of a need for Fed easing.

But that's not what Ryan is talking about. When he talks about
'bad fiscal policy' he means large deficits, and so he's saying
that the Fed is enabling large deficits by buying US Treasuries.

And on a superficial level, we can see why he thinks that. The US
Treasury is issuing a lot of bonds these days, and the
Fed has bought quite a lot of bonds, and interest rates
are very low. Furthermore, the ECB is buying
bonds to reduce borrowing costs of peripheral governments.

But in reality, the Fed doesn't buy bonds for the purpose of
enabling spending or reducing borrowing costs.

First of all, let's point out that although government borrowing
is near record levels, borrowing costs are actually quite low.

Here's Federal Government Interest Payments as a share of GDP.
They're very small. Debt is not creating cost pressure that the
Fed needs to solve.

Well, you might think that interest rates are only so low because
the Fed has intervened so much to depress rates.

But the data shows this is not what happened.

As this old chart from Jeff
Gundlach (via @condoroptions) nicely
shows, interest rates on the 10-year bond actually jumped after
the start of QE1 and QE2.

DoubleLine
Capital

But maybe you think that this is just a chart quirk, and that
still the reason rates have gone so low is because of the Fed.

But the decline in government rates has been a global phenomenon.

Yields in Mexico, Japan, Australia, the UK, and Canada are all
close to all-time low levels for the decade.

FRED

The fact of the matter is that what moves rates are inflation
expectations, growth, and the desire for safe assets.

Growth has been very poor for the last few years, and the crisis
in Europe has created a huge boom in demand for safe, government
assets.

That's why rates are so low.

And what Bernanke has tried to do (with limited sucess) is get
out of the ZIRP trap, by trying to promote inflation and growth
and actually send interest rates higher.

Here's Ryan's interview on CNBC. The stuff about the Fed bailing
out the government starts at 5:19.